handbook-tb

Preventing avoidance of permanent establishment statusnot or whether the splitting of the contract is done in the context of thebusiness model of the group of companies, or even whether the splittingis done between resident and non-resident associated companies.The clause has, however, several disadvantages:‣ ¾ Tax administrations should have the resources to detect thepresence of associated companies within their territory for morethan the time threshold established in the treaty in order toaccumulate the periods of presence of all associated enterprises.For implementation purposes, establishing obligations in thisregard on the persons that act as clients can be considered (forexample, notification of projects lasting for more than the timethreshold, withholding tax obligations, obligation to request theattendance records of employees from the contractor or othercompanies of the same group, potential liabilities of the clients);‣ ¾ The application of the clause to “substantial or identical activities”of the different companies providing the service leavesroom for debate over when this condition is met;‣ ¾ The reference to Article 9 includes only associated enterprises— one in a contracting State and another in the othercontracting State. It may not be fully effective in cases wherethe splitting is likely to take place between two or more nonresidentcompanies, a situation that is not covered by Article 9of the OECD Model Convention. In order to avoid this problem,some treaties provide a definition of associated companies, forexample, Article 5 (4) (c) of the tax treaty between the UnitedKingdom and Australia (2003) 111 or Article 5 (5) of the taxtreaty between Japan and Australia (2008); 112‣ ¾ Subcontracting by associated companies to non-associated companiesshould also be covered, although it may be interpreted111Convention between the Government of the United Kingdom of GreatBritain and Northern Ireland and the Government of Australia for the Avoidanceof Double Taxation and the Prevention of Fiscal Evasion with respect toTaxes on Income and on Capital Gains, of 21 August 2003.112Convention between Japan and Australia for the Avoidance of DoubleTaxation and the Prevention of Fiscal Evasion with respect to Taxes onIncome, of 31 January 2008.391